Dark economic clouds gather for eurozone, US, and Britain

With economic activity weakening, concerns are growing that soaring inflation and war in Ukraine will tip the world into recession

Japanese output shrank as a resurgence in Covid-19 cases further depressed demand that was already struggling under the weight of surging inflation. 

Economic activity weakened from the US to Europe and Asia, reinforcing concerns that soaring prices and the war in Ukraine will tip the world into a recession.

US business activity contracted for a second-straight month in August, falling to the weakest level since May 2020, S&P Global data showed. 

Activity in Asia slumped, and output in the eurozone also fell as record energy and food inflation saps demand and more sectors succumb to the darkening outlook. 

The US figures pointed to weaker demand at both manufacturers and service providers as rising interest rates and high inflation weighed on consumers. New orders shrank for the second time in three months, and employers scaled back hiring.

In Europe, manufacturing drove the drop, but a post-lockdown rebound in services like tourism almost ground to a halt. 

Against a backdrop of elevated inflation and a slowdown in the global economy, central bankers from around the world are gathering this week at the annual Jackson Hole retreat in the US. US Federal Reserve chair Jerome Powell will speak on the economic outlook on Friday.

The UK’s purchasing managers’ index managed to remain above the 50 level that separates expansion from contraction, but recorded an unexpectedly large plunge in factory activity. 

Over in Asia, Japanese output shrank as a resurgence in Covid-19 cases further depressed demand that was already struggling under the weight of surging inflation. 

Australia’s services sector contracted for the first time in seven months, though it was offset somewhat by an uptick in tourism. 

And in China, the government’s ongoing commitment to Covid Zero and a worsening real-estate slump are weighing on consumer and business confidence.

The data paint a bleak picture for the global economy, with most central banks still focused on taming inflation by raising borrowing costs. 

And while rate hikes will add to the pain of the downturn, they may not even bring excessive price gains back to where they were before this spike, according to investors, including Pacific Investment Management Co, or Pimco.

For the eurozone, the numbers “point to an economy in contraction during the third quarter”, S&P Global economist Andrew Harker said. 

“Declining output is now being seen across a range of sectors, from basic materials and autos firms through to tourism and real estate companies as economic weakness becomes more broad-based in nature,” he said.

Eurozone consumer confidence, however, unexpectedly improved, though it remained below anything seen during the pandemic as the rising cost of living hurts households and energy shortages threaten to curb economic output, the European Commission said. 

• Bloomberg